FINANCIAL STATEMENTS
AND RATIO ANALYSIS
Jeff Goolsby, Shareholder, CPA, MSA
Moore Stephens Lovelace, P.A.
1
OVERVIEW OF THE SESSION
A Provide information on how ratios can provide insight
into financial statements
 B Give information about key ratios and what the data
can tell you
 C Provide insight into what management should focus
on in understanding numbers
 D Clarify when ratios are not helpful
 E Overview ready to access ratios available for Florida
Government’s

2
TRADITIONAL F/S MEASURES –
BALANCE SHEET
•
•
•
•
•
•
Cash
Accounts Receivable
Inventory
Investments
Current Assets
Total Assets
•
•
•
•
•
•
•
Payables and Accruals
Current portion of Debt
Current Liabilities
Long-Term Debt
Total Liabilities
Retained Earnings
Total Equity
3
TRADITIONAL F/S MEASURES –
OTHER STATEMENTS
Income Statement
•
•
•
•
•
•
Revenue
Costs of Goods Sold
Gross Margin
Other Expenses
Operating Income
Net Income
Cash Flows
•
•
•
Cash flows from
operations, investing,
and financing
Net change in cash
Activity of PPE,
Investments, Debt, and
Equity
4
UNIQUE GOVERNMENTAL MEASURES –
ALL STATEMENTS
•
•
•
•
•
Deferred outflows of
resources
Deferred inflows of
resources
Net investments in capital
assets
Unrestricted Net Position /
unassigned fund balance
Restricted Net Position /
assigned fund balance
•
•
•
•
Nonspendable fund
balance
Intergovernmental
revenues
Cash flows form noncapital
financing activates
Cash flows from capital
and related financing
activities
5
WHEN THE NUMBERS DON’T ADD UP
6
VALUE OF INFORMATION
 Gives
•
•
•
reader understanding of:
the size of organization and its activities
composition of resources and liabilities
results of operations and impacts on cash
 Generally
comparative allowing easy comparison
to prior year
•
Generally governmental statements are single year
 Footnotes
•
contain detailed information
MD&A can provide insight into reasons
7
STATEMENT USERS
Creditors
 Bondholders
 Owners
 The Market
 Potential Buyers / Investors
 Competitors
 Management
 Citizens

8
USER FOCUS – THIRD PARTIES
 Liquidity
of an entity and its ability to make interest
and principal payments
 Long-term
cash flow of the entity as well as the
entities future level of risk and return, which
impacts return on investment
 Ability
to provide dividends (public co’s)
 Operational
results for comparative purposes
9
USER FOCUS – MANAGEMENT
 Liquidity
of an entity and its ability to make interest
and principal payments
 Planning
– Assessing current financial position and
evaluating potential opportunities
 Asset
Management – Use of assets for efficiency
and best return on investment
 Understanding
entity
– How external parties analyze the
10
USE OF FINANCIAL ANALYSIS
Trend / Seasonal Component
1. Analysis of the entities
funding needs
How much funding will be
required in the future?
Is there a seasonal component?
Analytical Tools Used
Sources and Uses Statement
Statement of Cash Flows
Cash Budgets
11
USE OF FINANCIAL ANALYSIS
Entity Financial Condition
Financial Ratios
2. Analysis of the entities financial
condition and profitability.
1.
2.
3.
4.
Individually
Over time
In combination
In comparison
12
USE OF FINANCIAL ANALYSIS
3. Analysis of the business
risk of the firm.
Business risk relates to
the risk inherent in the
operations of the firm.
Examples:
Volatility in sales
Volatility in costs
Proximity to break-even point
13
USE OF FINANCIAL ANALYSIS
Determining the financing
needs of the firm.
Management should
consider all three analysis
types; funds needs, financial
condition and profitability
and business risk, when
determining the financial
needs of an entity.
14
USE OF FINANCIAL ANALYSIS
Proper determination of an
entities financing needs.
Proper evaluation of
financing needs puts the
entity in the best position
to negotiate with potential
capital suppliers
15
TYPES OF RATIO COMPARISONS
•
Cross-sectional analysis - comparison of different
entities’ financial ratios at the same point in time;
involves comparing the your entity’s ratios to those of
other entities in its industry or to industry averages

Benchmarking – entity ratios compared to those of a
key competitor or group of competitors

Comparison to Industry Averages – use of industry
averages for the analysis of entity’s results
16
Example of Cross-Sectional Analysis
Requires access to financial statements of competitors
17
USE AVAILABLE BENCHMARK DATA
18
SOURCES OF INFORMATION
Financial Statements
•
•
•
(* free)
Public Companies – Various Sources*
Non-profits – Guidestar.org (Form 990’s)*
Public Debt (Municipal Bonds) – Dacbond, EMMA*
Benchmarks
•
•
•
•
BizStats.com*
Trade associations Published Statistics
Dunn & Bradstreet’s Industry Norms and Key Stats
Risk Management Assoc Annual Statement Studies
19
TYPES OF RATIO COMPARISONS
•
Vertical Analysis (Common Size) – process of
preparing financials statements as a percentage of
sales or other account category. Allows analysts to
see the composition of different categories of
financial statements.

In the evaluation of the income statement sales is
commonly used as the reference category.

Evaluation of the balance sheet incorporates total
assets, liabilities and equity.
20
EMPHASIS FOR MANAGEMENT –
VERTICAL ANALYSIS
•
•
•
This is simple to do on your own company
Works really well for certain industries (e.g.,
manufacturing, retail) to allow comparison
Allows management to focus on areas that go
against the trend
– In a high growth environment; financial
numbers generally go up. This can factor out
growth to isolate variances
21
Example
Company X – opens
new plant in 2014
Revenue
2014
$ Change
$ 1,000,000
$ 800,000
(1,404,000)
( 800,000)
622,000
Gross Marin
396,000
200,000
196,000
Marketing Exp
110,000
40,000
70,000
190,000
100,000
90,000
$ 96,000
$ 60,000
$ 36,000
Costs of Sales
General Admin Exp
Net Income
$ 1,800,000
2013
22
Using Vertical Anal
All Items Divided
By Revenues
Revenue
2012
$ Change
100%
0%
78%)
80%
(2%)
Gross Marin
22%
20%
2%
Marketing Exp
6.1%
4%
2.1%
General Admin Exp
10.6%
10%
0.6%
5.3%
6.0%
(0.7%)
Costs of Sales
Net Income
100%
2011
(
Profit would have been $38,000 higher if marketing
was at prior year’s 4%
23
LIMITS OF INFORMATION
•
•
•
•
Requires understanding of accounting
policies
Trending information is limited to
comparative numbers
Generally, information in footnotes to
understand changes is limited
Fair value changes can impact
profitability
24
RATIO ANALYSIS - DEFINED
 A method or process by which the relationship of
items or groups of items in the financial
statements are computed, and presented.
 Tool for the financial analysis of an entity.
 Method utilized to interpret the financial
statements. Including the identification of an
entities strengths and weaknesses from a current
and historic view point.
25
TYPES OF RATIO COMPARISONS
•
•
Time-series (Horizontal) analysis - evaluation of
the entity’s financial performance over time using
financial ratio analysis

Comparison of current to past performance, using
ratios, enables analysts to assess the entity’s progress.

Developing trends can be seen by using multiyear
comparisons.
The most informative approach - combines
multiple analyses.
26
• Be mindful of
company’s
accounting
policies and the
impact on
ratios
• Ratios can
look much
better under
accounting
policies
27
RATIO CLASSIFICATIONS
Ratios are generally classified into the follow
groups:
•
Short Term Debt Paying and Liquidity ratios
(“STDL”)
•
Capital structure/leverage ratios
•
Profitability ratios
•
Activity ratios
28
STDL RATIOS
Analyze the ability of an entity to pay its debt from
existing current assets, collect receivables quickly,
convert inventory into cash. Better performance is
indicated by ratios that result in lower number of days
or higher number of times per year.





Immediate Liquidity
Receivables Liquidity
Inventory Liquidity
Operating Cycle
Other Considerations
29
STDL RATIOS
Immediate Liquidity Ratios Include:






Working Capital – ($CA – $CL)
Sales to working capital – (NS/AWC)
Current Ratio – CA/CL
Acid/Quick Ratio – (CA-Inv/CL)
Conservative Acid/Quick Ratio –
(CCE+MS=NAR)/CL
Cash Ratio – (CCE+MS)/CL
30
STDL RATIOS
Receivables Liquidity Include:
A/R Turnover – NS/Avg Gross Rec
 AR Turnover in Days – Avg Gross Rec/(NS/365)
 AP Turnover – Avg AP/(COGS/365)

31
STDL RATIOS
Inventory Liquidity Include:
Inventory Turnover – COGS/Avg Inventory
 Inventory Turnover in Days – Avg
Inventory/(COGS/365)

32
STDL RATIOS
Operating Cycle Ratio:

Operating Cycle Ratio – AR Turnover in
Days/Inventory Turnover in Days
33
STDL RATIOS
•
Other Considerations:
–
Lines and Letters of Credit generally disclosed in
the notes to the financial statements and provide
information on short term funding available to an
entity.
–
If available obtain the entities short term debt
rating from a commercial source S&P, Moody’s etc.
to evaluate if ratio results are in line with the
rating.
34
CAPITAL STRUCTURE/ LEVERAGE RATIOS
(i)
(ii)
These ratios indicate the long term
solvency of a firm and indicate the ability
of the firm to meet its long-term
commitment with respect to
repayment of principal on maturity or in
predetermined instalments at due dates
and
periodic payment of interest during the
period of the loan.
35
CAPITAL STRUCTURE/ LEVERAGE RATIOS
•
Debt Ratios – these ratios measure the magnitude
•
Income Related Ratios – these ratios provide
of liabilities.
insight into how much income exists to protect
creditors.
36
CAPITAL STRUCTURE/ LEVERAGE RATIOS
Debt ratios are:
–
–
–
Debt ratio – Total Liab/Total Assets
Debt to equity ratio – Total Liab/Sh Eq
Debt to tangible net worth – Total Liab/(Sh
Eq-Intang Assets)
37
CAPITAL STRUCTURE/ LEVERAGE RATIOS
Income Related Ratios:
interest
–
Times
Exp+Capitalized Int)
–
earned
–
EBIT/(Int
Fixed charge coverage – (EBIT+1/3 of CY
Operating Lease Rentals)/(Int Exp+Capitalized
Int+1/3 of CY Operating Lease Rentals)
38
CAPITAL STRUCTURE/ LEVERAGE RATIOS
•
Other Considerations:
–
Pension obligations review the footnotes for
consistency of assumptions with professional
standards (interest rates, compensation increases
etc.).
–
If available obtain the entities long term debt rating
from a commercial source S&P, Moody’s etc. to
evaluate if ratio results are in line with the rating.
39
PROFITABILITY RATIOS
These ratios measure the operating efficiency of
the firm and its ability to ensure adequate returns
to its shareholders.
The profitability of a firm can be measured by its
profitability ratios.
Further the profitability ratios can be determined
(i) in relation to sales and
(ii) in relation to investments
40
PROFITABILITY RATIOS
Profitability ratios in relation to sales:
• Gross profit margin – GP/Net Sales
• Net profit margin – Earnings Available to
Owners/Net Sales
41
PROFITABILITY RATIOS
Expense ratios are calculated by dividing the various expenses
by sales:
Material consumed ratio – (Material consumed/Net Sales)x100
Manufacturing expenses ratio – (Manuf. Exp/Net Sales)x100
Administration expenses ratio – (Admin Exp/Net Sales)x100
Selling expenses ratio – (Selling expenses/Net Sales)x100
Operating ratio – (COGS/Net Sales)x100
42
PROFITABILITY RATIOS
Profitability ratios in relation to investments
•
Return on assets (ROA) – (Net Prof. After
Taxes/Total Assets)x100
•
Return on capital employed (ROCE) – (Net Prof.
After Taxes+Int/Capital Employed)x100
•
Return on shareholder’s equity (ROE) – (Net
Prof. After Taxes-Pref Div/Ordinary SH Equity or
Net Worth)x100
43
PROFITABILITY RATIOS
Profitability ratios in relation to investments
• Earnings per share (EPS) – (Net Profit
After Tax- Pref. Div)/Number of Eq Shares
• Dividend per share (DPS) – Dividends
Paid/Number of Equity Shares
44
GAAP (USER VS USER)
• Accounting
Principles continue
to focus more on
fair value
• Considered more
relevant
information to
markets
• May cloud
decision making
45
READER FOCUS
Wall Street /
Investors
Lenders
Key Metrics
Earnings Per Share,
Stock Price, Return on
Equity, Return on
Assets
Debt Service Coverage
Ratio, Current Ratio,
Cash Flows from
Operations, Days Cash
on Hand
Fair Value
Considered Relevant
Disregarded
46
LENDER’S FOCUS
•
Debt Service Coverage Ratio:
ITEMS EXCLUDED TYPICALLY ARE (A)
DEPRECIATION AND AMORTIZATION (B)
INTEREST INCOME (C) UNREALIZED GAINS AND
LOSSES & (D) EXTRAORDINARY ITEMS
47
LENDERS
FV Consideration
Debt Service Coverage Ratio (Goal:
cash available to cover debt service)
Days Cash On Hand (Goal: measure
ability to pay operating expenses with
existing cash reserves)
FV impacts adjusted out
of calculation
To degree investments
are marked to market
48
COMMON DEBT COVENANTS (Goal)
A primary reader of the financial statements largely
ignores fair value when measuring ability to service debt
and stability of entity.
48
THE IRONY OF FAIR VALUE IN LENDING
Standard setting
bodies focus on fair
value measures in
financial
statements
Financial
institutions provide
fair value to
auditors
Auditor uses fair
value in financial
statements
Financial institutions adjust financial statements to
remove fair value to focus on cash and cash
generation (Can they pay their loans?)
49
ACTIVITY RATIOS
These ratios are also called efficiency ratios /
asset utilization ratios or turnover ratios. These
ratios show the relationship between sales, cost
of goods sold and various assets of a firm.
There are several ratio groups used to analyze
activities including:
A/R ratios
Inventory/stock turnover ratio
– Asset turnover ratio
– Creditors turnover ratio and average credit period
–
–
50
ACTIVITY RATIOS
Accounts Receivable Ratios
• AR Turnover – Credit Sales/Avg Receivable
Balance
• Days In Receivables – 365/Turnover Ratio
• AR to Sales – Avg Receivable
Balance/Credit Sales
• AR to Assets – AR/Total Assets
51
A/R Key Questions:
1. Do You Know What Your
Average Days in Accounts
Receivable Are?
2. How long would it take to
discover a collection
issue?
3. Do you know what your
industry benchmarks are?
52
EMPHASIS FOR MANAGEMENT – A/R
•
•
•
The days in accounts receivable should
be actively monitored by management
Measures how long it takes to collect
payment after the delivery of product or
service
The important thing to monitor is the trend
line (helps to identify early warnings of
collection problems in the future)
53
EMPHASIS FOR MANAGEMENT – A/R
•
•
•
The relationship between how often you pay
and how quickly you collect can have a
major “shift” in your cash position
Most companies have a net 15 or net 30 for
vendor payments. Payroll also occurs on
regular basis
Every additional day in accounts receivable
represents an investment
54
EXAMPLE
Cash $2.0 MM
Accts Receivable $2.5MM
Sales of $30.0MM
COS of $27.0MM
Margin
10%
Days in A/R
30 Days
Vendor Payments
30 Days
What is the impact on cash from going days in accounts
receivable of 30 to 40 days on a permanent basis?
A/R at 40 days would now be ~$3.3MM ($30MM * 40/365).
The Company would have now invested $800K in accounts
receivable reducing the cash balance to as much as $1.2MM.
55
COLLECTIONS
PAYMENTS
CASH
$2.5 million per
month
$2.25 million
per month
Lowers
overall
average cash
balance
56
EMPHASIS FOR MANAGEMENT – A/R
•
•
Equally important to compare days in
accounts receivable with and without
the allowance (Gross versus Net)
The net accounts receivable can mask
that collections have gotten worse or
that more is being reserved
57
ALLOWANCE MASKING OF DAYS
Year One
Gross Days in A/R
Net Days in A/R
Sales
30,000,000
Same
Accounts Receivable Gross
3,000,000
Same
Allowance
(500,000)
Same
Days in Accts Receivable
36.5 Days
30
Gross Days in A/R
Net Days in A/R
Sales
30,000,000
Same
Accounts Receivable Gross
4,000,000
Same
(1,500,000)
Same
48.7 Days
30
Year Two
Allowance
Days in Accts Receivable
58
EMPHASIS FOR MANAGEMENT – A/R
•
•
•
A significant increase in sales is often
accompanied by a permanent increase in
the average balance of A/R
The one time “build-up” of A/R represents
an investment of sorts in growth and will
have a one-time impact on cash
Monitoring of days in accounts receivable
is important during growth periods
59
EXAMPLE
Days in A/R
Sales of $30.0MM
COS of $27.0MM
Margin
10%
30 Days
Sales of $35.0MM
COS
$31.5MM
Margin
10%
30 Days
A/R will have gone up from $2.5MM (30MM * 30/365) to $2.9
Million ($35MM *30/365). There is $400K investment in
accounts receivable from growth.
This assumes that days in A/R would remain at 30 days
despite growth in volume of receivables
60
EMPHASIS OF MANAGEMENT – A/R
•
•
Be wary of cycles in operations
Some companies pick the slow season
for the year-end when A/R is at the
lowest. This will artificially lower the
number of days in year-end A/R
(hence, important to monitor peak
seasons as well)
61
CASE STUDY - HEALTHCARE
•
Healthcare is an example of:
–
–
•
A) An area where benchmarks can be helpful
B) An area where the metrics differ significantly
between different types of “providers”
Example for Days in Accounts Receivable
–
–
–
Hospitals: 45 days
Nursing Home: 35 days
Physician Practice: 20 days
62
CASE STUDY - HEALTHCARE
•
Examples of Operating Margin
Hospitals: 2.6%
– Nursing Homes: 8.0%
– Physician Practices: 11%
–
•
Labor Costs – 60% to 65%
–
Specific stat that should be tracked and
monitored
63
SAMPLE – PUBLIC HOSPITALS (MUNIOS)
64
65
ACTIVITY RATIOS
Inventory Ratios
• Inventory Turnover – COGS/Avg Inventory
• Net Sales to Inventory – Net
Sales/Inventory
• Inventory to Net Working Capital –
Inventory/Net Working Capital
66
Inventory Key Points:
1. Do You Know What
Inventory Turnover Is?
2. What is the latest trend
on your cost of sales
margin % and gross
margin %?
3. Do you know what your
industry benchmarks are?
67
EMPHASIS OF MANAGEMENT - INV
•
•
Gross margin and inventory turnover
are key metrics for manufacturers and
retailers
There is really good data available that
is specific to the industry (and the sub
industry)
68
EMPHASIS OF MANAGEMENT - INV
•
•
The trending on these metrics needs
to monitored
These can also be manipulated as well
FIFO versus LIFO
– Sale-offs without replenishing inventory
levels equal high turnover but a potential
problem to future
–
69
Example BizStats Reports
70
EMPHASIS OF MANAGEMENT - INV
•
•
•
For management, inventory turns and
margins should be looked at by
product line
Identify possible obsolete; slow
moving items
Reprioritize inventory and or location
71
ACTIVITY RATIOS
Asset Turnover Ratios
• Total Asset Turnover – Net Sales/Avg Total
Assets
• Fixed Asset Turnover – Net Sales/Avg
Fixed Assets
• Working Capital Turnover – Net Sales/Avg
Net Working Capital
72
“We’ve been doing great since we redefined
success as a slowing of failure.” Dilbert
73
ACTIVITY RATIOS
Accounts Payable Ratios
• Accounts Payable Days – (AP/COGS)x365
• Accounts Payable Turnover – Total Supplier
Purchases/(AP Beginning + AP Ending)/2
• AP Turnover Days – 365/AP Turnover Ratio
74
EMPHASIS OF MANAGEMENT - AP
•
•
•
The opposite impact is true on Days in
Accounts Payable. Permanently
increasing the days in A/P will have a
one-time increase in cash
Be wary of giving up early payment
discounts
Be careful with critical vendors
75
BE WARY OF STATISTICS ALONE
•
•
•
•
“There are lies, damned lies, and statistics”
Mark Twain
“Statistics Defined – The science of producing
unreliable facts from reliable figures” Evan Esar
“There are two types of statistics, the kind you
look up and the kind you make up” Rex Stout
“60% of the time, it works every time” Ron
Burgandy
76
CAUTION
•
There are no generally accepted rules for
computing ratios.
•
Ratios alone do not provide answers, they are a
tool to be utilized with others for the user to
draw a conclusion from.
•
An entity’s knowledge of common ratios used to
evaluate an entities financial condition may lead
to the possibility of manipulation of the key ratio
components.
77
CAUTION
•
Large deviations or unexpected results merely indicate
a possible problem.
•
Use financial statements dated at the same point in
time.
•
Preferable to use audited financial information.
•
Results can be distorted if financial data is not
developed in the same manner or if inflation or other
market events occur which could significantly impact
the results.
78
CAUTION
•
Problems Disguised

Ratios that use multiple financial statement line items
(e.g. Current Ratio –Combines; Cash, A/R, Inventory,
etc.) can disguise poor performance in one.

Always evaluate ratios that look at single line items
and if the results seem acceptable then utilize those
ratios that combine these with others

Be wary of small numbers (large % changes)
79
WHEN THE NUMBERS AREN’T GOOD
80
FINANCIAL FAILURE?
•
•
•
If some of the basic ratios appear to be
indicating an entity experiencing problems there
is a group of ratios which have been shown as
indicators of this.
Caution should be used however, as the results
can only say the results are similar to those of
entities that have failed in the past.
Ratios alone cannot predict financial failure.
81
FINANCIAL FAILURE?
Univariate Models – use of one variable for
analysis.
• Cash flow to total debt – insufficient cash flows
indicate possible problems
• ROA – low earnings on committed assets
indicates problems making assets work for the
entity
• Debt Ratio – assets financed with too much debt
put the entity in a position where it may not be
able to make interest and/or principal payments
82
FINANCIAL FAILURE?
Other Useful Indicators – these must be
compared to industry standards to determine
the entity results.
•
•
Veritical Common Size % Inventory – failed
entities have less inventory. Commonly due to
poor credit to obtain additional inventory and
sell as much inventory as possible to generate
cash flow.
Vertical Common Size % Cash – failed firms
have less cash often using credit to “float”
operations.
83
BENCHMARKING AVAILABLE FOR
FLORIDA GOVERNMENTS
•
Florida requires auditors to perform a financial
condition assessment


•
Required reporting if the auditor determines there is
a deterioration in financial condition
Serves as an early warning against Florida’s state
and local governments becoming insolvent
Available on Florida Auditor General Website

http://www.myflorida.com/audgen/
FLORIDA AUDITOR GENERAL WEBSITE
BENCHMARKING AVAILABLE FOR
FLORIDA GOVERNMENTS
Auditor General website has these appendixes
which contain detailed information to understand
and help in your analysis
AUDITOR GENERAL INDICATOR 1
Change in Net Position /
Beginning Net Position


Goal is to determine how the government’s position
changed as a result of resource flow
A decrease would indicate the government’s financial
position is becoming weaker
88
Unfavorable =
Trend Inf ormation
Favorable =
Y1 to Y5 Dif f
Y2 to Y5 Dif f
95%
Benchmark Comparison Inf ormation
Y5 Entity
-0.05%
99%
Y5 Bench
0.20%
Y3 to Y5 Dif f
-102%
Y5 Entity to Bench Dif f
-125%
Tre nd:
Favorable
Be nchm ark
Com paris on:
Overall Rating:
Favorable
Inconclus ive
AUDITOR GENERAL INDICATOR 2
Unassigned and Assigned Fund Balance /
Unrestricted Net Assets


Declining results suggest there could be difficulty in
maintaining a stable tax base or revenue structure
Deficits may indicate financial emergency
90
AUDITOR GENERAL INDICATOR 3
Unassigned and Assigned Fund Balance /
Total Expenditures

Decreasing percentages over time may indicate
budgetary issues that may lead to future budgetary
problems
91
AUDITOR GENERAL INDICATOR 4
Cash & Investments /
Current Liabilities

Decreasing percentages may indicate that the
government has overextended itself in the long run and
may have difficulty raising the cash needed to meet its
current needs
92
AUDITOR GENERAL INDICATOR 5
Cash & Investments /
Total Expenditures


Denominator is operating expenses for a proprietary fund
Decreasing percentages may indicate that the
government has overextended itself in the long run and
may have difficulty raising the cash needed to meet its
current needs
93
AUDITOR GENERAL INDICATOR 6
Current Liabilities /
Total Revenues


Denominator is operating revenues for a proprietary fund
Increase percentages may indicate liquidity problems,
deficit spending, or both
94
AUDITOR GENERAL INDICATOR 7
Long-Term Debt /
Population

Increasing percentages may indicate a decrease in level
of flexibility in how resources are allocated and
decreasing ability to pay long-term debt
95
AUDITOR GENERAL INDICATOR 8
Excess of Revenues Over Expenditures /
Total Revenues

Decreasing surpluses or increasing deficits may indicate
that current revenues are insufficient
96
AUDITOR GENERAL INDICATOR 9
Operating Income (Loss) /
Total Operating Revenues

Decreasing income and increasing losses may indicate
that current revenues are not supporting current
expenses
97
AUDITOR GENERAL INDICATOR 10
Intergovernmental Revenues/
Total Revenues


Proprietary funds use Operating Revenues as the
denominator
Percentages increasing over time indicate a greater risk
assumed to increased dependence on outside revenues
98
AUDITOR GENERAL INDICATOR 11
Unassigned and Assigned Fund Balances/
Total Revenues


Proprietary funds use unrestricted net assets / total
operating revenues
Decreasing results may indicate a reduction in the local
government’s ability to withstand financial emergencies
and / or its ability to fund capital projects
99
AUDITOR GENERAL INDICATOR 12
Total Revenues/
Population

Decreasing trends indicate that the local government
may be unable to maintain existing service levels with
current resources
100
GUIDANCE AVAILABLE TO UNDERSTAND
MEASURES AND RATIOS
Auditor General website has these appendixes
which contain detailed information to understand
and help in your analysis
AUDITOR GENERAL INDICATOR 13
Debt Service/
Total Expenditures

Increasing trends indicate that the cost of providing
services is outpacing the ability to pay for them
102
AUDITOR GENERAL INDICATOR 14
Total Expenditures/
Population

Increasing trends indicate that the cost of providing
services is outpacing the ability to pay for them
103
AUDITOR GENERAL INDICATOR 15
Accumulated Depreciation/
Depreciable Capital Assets

Increasing trends indicate that capital outlay is
inadequate increasing deferred replacement or
maintenance costs
104
AUDITOR GENERAL INDICATOR 16 / 17
Pension Plan Funded Ratio
&
OPEB Funded Ratio

A declining trend suggest that there is inadequate
funding that may increase future tax burden
105
AUDITOR GENERAL INDICATOR 18
Millage Rate

Millage rates approaching statutory limits may indicate
that the government has a reduced ability to raise
additional funds
106
MANAGEMENTS USE OF RATIOS
107
QUESTIONS
Jeff Goolsby jgoolsby@mslcpa.com
108